Inflation can be far worse than Deflation… Hyperinflation!

How can Inflation be worse than Deflation?  We described deflation Friday which you can read here, and that seems pretty awful!  What’s worse?  Hyperinflation!  Let’s look at what inflation is, how it can affect you, its two causes, and what can push inflation into hyperinflation.

The usual reason for inflation is an increase in the money supply.  It’s very simple.  There would be no inflation if the government would not continue to print new money.

However, most people have felt that a small amount of inflation greases the wheels of the system and keep things running smoothly.  After more than a century of no inflation, the US government started increasing the money supply beyond the gold and silver that we had to back our currency and inflation was born.  For most of that time it has been a slow steady erosion of your wealth that the government has perpetrated.  Your money is worth a little less every year, but they tell you it is for your own good.

But in the last year and a half, the money supply has been increased at an extraordinary rate.  We’ve grown from around $800 Billion in currency to over $2 Trillion! This increase in the money supply has not been felt to any large degree throughout the economy, but when it does, prices will increase with the new influx of money supply.  Interest rates will rise and you will be chasing elusive wealth as everything you own is continually worth less in real terms than it was before.

The other less talked about way that inflation can happen is if there is a worldwide run away from holding US Dollars.  If the people of the world were to decide that they no longer trust the integrity of the US Dollar, they could sell their Dollar holdings and not show up to lend more money to the US government which it needs continually to pay for its budget.
This would lead to a swift drop in the value of the Dollar on the world stage.  All of the goods which we are accustomed to consuming from foreign countries would become much more expensive as would any locally made goods which have a worldwide market.  This is inflation and it hurts because your income will not rise as quickly as the cost of the things that you buy to live.

The stock market would tend to be more chaotic, but good companies with pricing power should also inflate in value.  Companies which sell luxuries that aren’t necessary to people could be significantly hurt or out of business.  Bond prices would get crushed because who wants to buy a 5% bond from you when the new ones are paying 10 or 15%?  And that stream on income from bonds which used to seem reasonable is now woefully small!  Commodity prices and real estate will also rise in this environment.

But the next question you need to ask yourself is: If no one wants to hold US Dollars, how are we going to continue to sell the massive deficit that we finance every year?  This is where Hyperinflation comes in!  We’ll discuss more of this tomorrow.

We do have a free event tomorrow night here in Austin where we’ll talk about which of these realities will manifest: inflation, deflation, or hyperinflation and what you can do to prepare, protect and even grow your assets.  Click here to learn more or sign up here.

This post is Part 3 in the series Inflation or Deflation. To continue with this series, click on Pt 4. To read the rest of this series, please read Pt 1 and Pt 2.

Photo credit: robertarmand2002

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